Japan's Economy Accelerated in First Quarter

Bloomberg News

Japan's economy grew at the fastest pace since 2011 in the first quarter as companies stepped up investment and consumers splurged before the first sales-tax rise in 17 years last month.

Gross domestic product grew an annualized 5.9 percent from the previous quarter, the Cabinet Office said today in Tokyo, more than a 4.2 percent median forecast in a Bloomberg News survey of 32 economists. Consumer spending rose at the fastest pace since the quarter before the 1997 tax increase, while capital spending jumped the most since the aftermath of the 2011 earthquake.

Today's data add to signs the economy will have sufficient momentum to bounce back from the 3 percentage point levy rise that is projected to trigger a contraction this quarter. Abe needs companies and consumers to keep spending as the focus shifts to whether the nation can withstand a planned further increase in the tax.

'Consumption was a driver for growth in the first quarter,' Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo, said before the report. 'The economy may return to growth in the third quarter even if it shrinks in the second, though the rebound is likely to be limited.'

Higher Spending

Consumer spending rose 2.1 percent from the previous quarter, the highest since a 2.2 percent increase in the first three months of 1997, the period before the last increase in the sales tax.

Capital expenditure increased 4.9 percent, the most since an 8.2 percent jump in the last three months of 2011, in the aftermath of the Tohoku earthquake and nuclear disaster. HSBC Holdings Plc economist Izumi Devalier said a statistical distortion may have pumped up the number.

The Topix (TPX) stock index was down 1.2 percent as of 9:43 a.m. in Tokyo as a stronger yen overshadowed today's GDP report. The Japanese currency rose 0.1 percent to 101.80 against the dollar.

The economy will contract 3.3 percent in the April-June period before expanding 2 percent the following quarter, according to a separate Bloomberg News survey conducted prior to today's data.

Expenditure soared in March on items such as refrigerators and computers, while vehicle sales rose in the seven months through March before slumping in April.

The hangover from the levy rise is starting for Japanese companies. Firms from Japan Tobacco Inc. to Uniqlo store operator Fast Retailing Co. (9983) and electronics maker Panasonic Corp. see weak retail spending in their outlooks.

Beer Sales

Beer shipments in April fell 21 percent from a year earlier, the largest fall since at least 2005, after rising 17 percent the previous month.

For Toyota Motor Corp., the nation's largest company, the decline in domestic demand adds to the carmaker's challenges as it looks to fend off General Motors Co. and Volkswagen AG for global sales leadership.

The increase in business spending in the first quarter compared with a 1.4 percent expansion in the previous three months. Large companies plan to boost investment 0.1 percent in the year ending March 2015, according to a Bank of Japan survey.

Toshiba Corp. and SanDisk Corp. said yesterday they would invest in a chip-making facility in western Japan. The companies will invest as much as 500 billion yen on converting the plant for production, the Nikkei newspaper reported.

Fleeting Impact

A confidence gauge this week indicated the blow from the tax increase may be fleeting. This may lower the need for the Bank of Japan to add stimulus and raise the odds the government will proceed with a plan to further increase the tax rate in October 2015 to 10 percent from 8 percent now.

The negative shock from the higher tax 'is as we anticipated or even slightly less than we anticipated,' Bank of Japan Governor Haruhiko Kuroda said May 5 in an interview with CNBC Television in Kazakhstan.

The government will base a decision on whether to further raise the levy on the resilience of the economy in the third quarter, according to Economy Minister Akira Amari.

Adam Posen, Peterson Institute president and former Bank of England monetary policy committee member, warned yesterday against postponing the plan to raise the levy.

'If they fail to deliver the consumption tax hike in 2015, the negative reaction in equity and currency markets will be enormous, and the credibility of the Japanese government will be massively damaged,' Posen said in an interview in Tokyo.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

To contact the editors responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net Andy Sharp, James Mayger

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